Report the descriptive statistics and comment on the characteristics of the portfolio and the factors series. Discuss whether these series are appropriate for a regression analysis and what problems may arise from using such series?

Empirical Finance

When submitting your coursework assignment you must provide one Microsoft Word or PDF file containing your written/text answers to the questions. In your answers to the questions below, you should present your Eviews equation estimation output as it would be in published academic papers. (Examine several such papers, the approaches to presentation are fairly standard.) Raw Eviews output should be included only in an Appendix.

The report should not exceed 2000 words in length. It should have a clear introduction and a conclusion. You should ensure that you have fully acknowledged the work of others in the body of the text and include a full list of references for all articles, books and other sources (e.g. Internet sites) that have been cited in the assignment. Coursework will be processed with plagiarism detection software. Marks will also be given for the presentation of your work.

The data required for the coursework is contained in the excel file `Coursework_1_resit.xls’ in the coursework section on Moodle. The file contains the portfolio and monthly factor return data from July 1926 to December 2020 that we will use to estimate two standard asset pricing models: the classical CAPM and the Fama-French (FF) three factor model. The variables in the Excel file are: `RF’ containing the risk-free rate, `MktRF’ containing the excess return on the market portfolio (the single factor in the classical CAPM model), `SMB’ containing the small-minus-big factor from the FF three- factor model, `HML’ containing the high-minus-low factor from the FF three-factor model and `Port’ containing the portfolio returns.

Using a sample from October of 1980 to December of 2020 answer the questions below.

Question 1 (20 points)

Report the descriptive statistics and comment on the characteristics of the portfolio and the factors series. Discuss whether these series are appropriate for a regression analysis and what problems may arise from using such series? (The statistics should be in a nicely formatted table within the main text, with Eviews output in the Appendix.)

Question 2 (20 points)
Estimate the CAPM and Fama-French 3 factor model using OLS in EViews. Comment in detail on your regression outputs. State/interpret the magnitude and statistical significance of the slope coefficient estimates and the statistical significance and fit of the overall regression, for both models.

Question3 (20 points)

Compare the results between the two models of question 2 and comment on which one is better in describing the returns of the portfolio? Furthermore, discuss whether the regressions of question 2 violate any of the main assumptions.

Question 4 (20 points)
Estimate the CAPM model for the portfolio series using quantile regression in EViews for a set of quantiles ranging from 0.1 to 0.9. Comment in detail on your regression output. State/interpret the magnitude and statistical significance of the quantile slope coefficient estimates and compare them with the OLS estimates in Question 2. Perform an equality coefficient test across quantiles.

Question 5 (20 points)

Describe how to choose between two non-nested models and potential problems associated with such an approach. How would non-normal data affect this selection approach?

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